Online Pirates Scupper Music Business

Alicia was "humbled", Britney was sporting a new hairdo - a circa 1980s Kim Basinger - and Bono was posturing on stage, trying to put the world to right. At the Grammy awards, the glittering annual US music jamboree on Wednesday night, it was pretty much business as usual.

But if things seemed fine in the glare of the spotlight, the mutterings of the industry executives away from the stage were anything but.

A day later, Jennifer Lopez was shaking her thing back to No 1 in the Billboard album charts with a CD of remixes. She achieved sales of 102,000 during the week. So sharp has been the industry's decline that the figure would only have placed her at No 4 in the same week just three years ago.

In the final week of February 1999, Britney Spears's debut album was sitting at No 1 with almost twice as many sales as the offering from Jennifer Lopez.

According to SoundScan, which compiles the sales figures for Billboard, Britney Spears's Hit Me Baby One More Time sold 198,000 copies, followed by Lauren Hill at No 2 with 122,000 and Offspring at No 3, notching up sales of 115,000.

The US music industry is in a state of crisis and, like the proverbial deer in headlights, seems frozen by panic. Further statistics from the recording industry association of America (RIAA) suggest sales fell by 10.3% last year and the decline is continuing into 2002.

The chief reason for the slumping sales appears to be the internet. It's surely no coincidence that the biggest slide in sales worldwide has been in the US, where the use of computers in the home is highest and the population is the most internet-literate.

Although the industry has attempted to rethink its attitude to the internet, it remains very much more a threat than an opportunity.

"This past year was a difficult one in the recording industry and there is no simple explanation for the decrease in sales," says Hilary Rosen, chief executive of the RIAA.

"The economy was slow and 9/11 interrupted the fourth quarter plans, but a large factor contributing to the decrease in overall shipments last year is online piracy and CD-burning. When 23% of surveyed music consumers say they are not buying more music because they are downloading or copying their music for free, we cannot ignore the impact on the marketplace."

While the industry has tamed Napster, the poster child for rogue online distribution of music, others have sprung up to take its place. The labels have often been criticised for spending time and money on litigation when they should have been grappling with how to make the internet work for them.

But the legitimate online offerings recently set up by the big five labels have made little impact other than to provoke further ire from artists who say they are not being properly compensated. Napster has even managed to strike back. Last week a federal judge granted Napster's request to gather evidence that the majors have colluded to dominate the market for online distribution.

At the same time the industry is riven by an ugly dispute with the very artists at the core of the business. On the eve of the Grammys, a group of musicians including Sheryl Crow, Beck and Billy Joel staged four concerts in Los Angeles to raise money for the Recording Artists Coalition, which is supporting efforts to rewrite the way the industry does business. The artists want multi-album deals torn up and argue that the record companies have been withholding royalties.

The response from the music majors is that they need to make money from their big sellers to support investment in new talent. They say that fewer than 5% of albums released are profitable.

If the record companies are ripping the artists off then they certainly aren't doing a great job of it. BMG, the recording business owned by Bertelsmann of Germany, recorded a loss of £5m last year while Britain's EMI has of late issued repeated profit warnings. It is also expected to end the year in the red.

The other problem facing the industry is perhaps the hardest one to solve - the widely held view that the current output just isn't very good. The likes of Alicia Keys, who took five Grammys home are all too rare in an industry dominated by mediocre product. When U2, Sade and James Taylor are still walking off with awards after decades in the business, perhaps there were clues to the state of the industry on stage at the Grammys after all.